Friday, November 15, 2013

Janet Yellen signaled her support for continuing the central bank's US$85bil-a-month bond-buying until the world's biggest economy shows signs of a firm recovery.

She said unemployment at 7.3% was too high and reflected an economy running "far short" of its potential.

When unveiling the scheme in September 2012, the Fed had said it would only start winding it down when the economy was strong enough.

Meanwhile Federal Reserve Chairman Ben Bernanke said that the U.S. central bank would remain alert to preventing inflation from declining too far from its goal of 2 percent. And it is important that we continue to provide the necessary support to help put people back to work and keep inflation from falling too low.

The Fed's preferred gauge of price pressures facing consumers, the PCE price index, is running at slightly above 1 percent on a yearly basis. Bernanke said this was "too little."

The U.S. central bank has held interest rates near zero since late 2008 and quadrupled the size of its balance sheet to $3.8 trillion to spur growth and hiring through three rounds of massive asset purchases.

It has pledged to keep rates ultra-low until unemployment hits 6.5 percent, so long as the outlook for inflation stays under 2.5 percent. The October jobless rate was 7.3 percent.

These aggressive steps are designed to prevent price pressures from spiraling into Japan-style deflation, and Fed officials decided in October 2013 to keep buying bonds at an $85 billion monthly pace. Critics fear this so-called quantitative easing will stoke future inflation.

Bernanke said that these measures can be removed once the economy strengthens and when unemployment "falls to its sustainable level," referring to the maximum jobless rate the U.S. economy can tolerate without triggering inflation.

Then it will be important for the Fed to normalize policy, to begin to raise interest rates, to begin to reverse, in some way, quantitative easing, perhaps by just letting the assets we hold to run off, to mature.